The Bear Market in Commodities Continues

by Victor Sperandeo with the Curmudgeon


Commodity Prices and the Dollar:

The Bloomberg Commodity Index ETN (DJP), which tracks everything from lean hogs and coffee futures to natural gas and gold, sank 0.7% to an all-time low of 21.45 on Friday.    It's down (25.6%) YTD.  A paradox that few experts discuss is the five year continuous commodities decline (from 12/31/10) with compounded annual DJP loss of (15.27%), while the S&P 500 is up +9.86% compounded!

Chart courtesy of CNN Money


The S&P GSCI, formerly the Goldman Sachs Commodity Index (GSP), is down (38.1%) YTD due to its high energy weighting.  January Crude Oil closed at $35.36 on Friday December 11th, a level last reached in February 2009 and down from a 2015 high of $65.  Brent crude, the international oil benchmark, dropped $2.37 to $37.36 a barrel — the lowest since December 2008.  Oil prices are a third of the level they were 18 months ago and they have fallen almost 11 per cent since a rancorous OPEC meeting a week ago saw the cartel remove even the pretense of production restraint.


One interesting aspect of these commodity lows are that the dollar is off its intra-day highs (on 12/3/15) and is weakening.  Another is that the lows are occurring just before next week's FOMC meeting, where the media has assured us of a 25 bps increase in the Fed Funds rate.  




1.  In all other late stage economic expansions, commodities rose strongly due to demand to build more real things and infrastructure.  Interest rates also rose sharply due to increased credit demand, building inventories and inflationary pressures.


2. Victor's opinions below are in italics font.


U.S. Interest Rates and the Fed:                     


On October 23rd T-Bills yielded 1 bps (0.0001), while this Friday the yield was 23 bps.  Meanwhile, the 30 year U.S. government bond yielded 2.90% then vs 2.88% on Friday.  To say the yield curve is flattening is missing the point.  It screams the that it will be "one (increase) and done" on the Fed Funds rate and almost assuredly the Fed will have to reverse the increase in the near future.  Also note that "Junk Bonds" are in free fall -down (19%) from the 2014 highs- according to the SPDR Barclay High Yield Bond ETF (JNK).     


Certainly, the U.S. economy is NOT the reason for a rate hike.  One can make the case that the U.S. is very weak. It is a political rate hike -like everything else in the U.S.! The Fed has to raise rates so they can have some power to lower them later.


I strongly believe QE 4 is not going to happen, since the Fed owns too many bonds already.  Of course, the Fed will say that future rate increases will be “data dependent" which is “bull-oney.”  The data is fudged and the Fed can use propaganda to sway policy anyway they wish. For example, do we have a 5% unemployment rate with 94+ million people not in the work force and the lowest worker participation rate since the 1970's?  Honestly, can the Fed really say we have "low unemployment?”


China's Economy and IMF Reserve Status:


The other critical long term factor, besides the U.S. dollar increase causing the down-trend of commodities, is China's very weak economy.  Also, the IMF granting China reserve currency status will NOT help China's economy in the short run since the "effective date" for IMF reserve status is October 2016.  The 10.92% allocation was less than the expected 14% which implies less Yuan/stock buying next year. So although the dollar high has been made, in my view, China is in for a "Cyclone Roller Coaster” ride (think of the iconic Coney Island roller coaster in Brooklyn, which has an 85-foot drop at its highest point).



The fall in commodity prices is causing financial market anxiety, because investors are worried that it signals a slowdown in global demand and that any economic benefit from cheaper costs for consumers and businesses is being counteracted by the cutting of investment and jobs by the natural resources sector of the global economy.


The CURMUDGEON believes the huge global commodity bear market is largely due to tepid global demand which is a direct result of weak economic growth (if any).   The argument that the entire world has been transformed into an information services economy is bogus.  There is still the need for infrastructure in developing countries and also in the U.S.


Victor says that commodities are down due to U.S. government policy and massive new regulations, especially the Dodd- Frank law which the Fed oversees.  That law created lower institutional demand for commodities.  The Fed also kept interest rates low, so it could execute ZIRP and three rounds of massive QE.  Although a bear market in commodities still exists, we should always remember commodities are cyclical and they can't go "bankrupt."  


Perhaps, the words of David Ricardo (a great classic economist) are worth remembering:  

"Gold and silver, like other commodities, have an intrinsic value, which is not arbitrary, but is dependent on their scarcity, the quantity of labor bestowed in procuring them, and the value of the capital employed in the mines which produce them.”


Good luck and till next time...


The Curmudgeon


Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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